Foreign Earned Income Exclusion (Form 2555)

Overview

U.S. citizens and resident aliens living abroad are generally required to file a U.S. tax return and report worldwide income — even income earned entirely in a foreign country. The Foreign Earned Income Exclusion (FEIE) is the primary tool that reduces the resulting double-taxation burden.

For 2024, the FEIE allows you to exclude up to $126,500 of foreign earned income from U.S. taxation. For 2025, the limit is $130,000, and for 2026 it increases to $132,900 (adjusted annually for inflation). This exclusion is claimed on Form 2555 and attached to your Form 1040.

To qualify, you must meet one of two tests — the Bona Fide Residence Test or the Physical Presence Test — and your tax home must be in a foreign country.

Qualifying for the FEIE

Three conditions must all be met to claim the FEIE:

1. Your tax home must be in a foreign country. Your tax home is generally your main place of business or employment. You cannot have a tax home in the U.S. and claim the FEIE, even if you spend most of the year abroad.
2. You must be a U.S. citizen or qualifying resident alien. Green card holders and those who meet the Substantial Presence Test can qualify under the Bona Fide Residence Test. Nonresident aliens generally cannot claim the FEIE.
3. You must meet either the Bona Fide Residence Test or the Physical Presence Test (described in the next two sections).

Bona Fide Residence Test

You meet the Bona Fide Residence Test if you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year (January 1 through December 31).

Bona fide residence is based on your intent and actions — the IRS considers factors such as:

• The nature and duration of your stay
• Whether you set up a permanent home abroad
• Whether your family accompanied you
• Whether you participate in the social and cultural life of the country
• Whether you filed a foreign income tax return as a resident of that country

Physical Presence Test

You meet the Physical Presence Test if you are physically present in a foreign country or countries for at least 330 full days during any 12-month period. The 12-month period does not need to follow the calendar year — it can begin on any day of any month.

Key points about the Physical Presence Test:

• Days in transit through a foreign country do not count as foreign days
• Days in international airspace or waters do not count
• Days in the U.S. (even briefly) do not count toward the 330-day requirement
• The 330 days can be accumulated across multiple countries
• Unlike the Bona Fide Residence Test, intent is irrelevant — it is purely day-counting

If you leave the U.S. mid-year, you can prorate your exclusion based on the number of qualifying days within the tax year.

Exclusion Limits & Housing Exclusion

Foreign Housing Exclusion / Deduction: In addition to the FEIE, you may be able to exclude or deduct qualified housing expenses paid with foreign earned income. The housing exclusion applies if you have an employer-provided housing benefit; the housing deduction applies if you are self-employed.

Qualified housing expenses include rent, utilities (excluding phone), insurance, repairs, and similar costs. The base housing amount (approximately 16% of the FEIE limit) is excluded from the calculation — only the excess qualifies. Limits vary by city, with higher-cost locations receiving a higher ceiling.

What Counts as Foreign Earned Income

Foreign earned income means income you receive for personal services performed in a foreign country. Examples include:

• Wages and salaries for work performed abroad
• Freelance / self-employment income for services performed abroad
• Professional fees for services rendered in a foreign country

The following do not qualify as foreign earned income:

• Interest, dividends, and capital gains
• Pension and annuity payments
• Social Security benefits
• Deferred compensation or amounts included in gross income due to nonqualified plan participation
• Amounts paid by the U.S. government to its employees abroad

Filing Form 2555

The FEIE is claimed on Form 2555, which is filed with your Form 1040. Key points about the filing process:

• Election and revocation: The first time you claim the FEIE, you are making an election that applies to all future years. If you revoke the election, you cannot claim it again for five years without IRS approval.
• Filing deadline: Your return is due April 15, with an automatic 2-month extension to June 15 for taxpayers abroad. You can request a further extension to October 15 by filing Form 4868.
• FBAR and FATCA: If you have foreign financial accounts or assets above thresholds, you may also need to file FinCEN 114 (FBAR) and Form 8938 regardless of the FEIE.
• State taxes: The FEIE only applies to federal taxes. Some states conform to the exclusion; others do not. California, for example, does not recognize the FEIE — California-source income and income connected to California remains taxable.

Note that the "stacking rule" means excluded income is effectively taxed at the marginal rate that would have applied if the exclusion did not exist — your remaining income starts at the bracket where excluded income left off, not at zero.

State Tax Considerations

Living abroad does not automatically sever your state tax obligations. Whether you still owe state tax depends on your domicile — the state you consider your permanent home:

• California is particularly aggressive about asserting residency. You generally need to take affirmative steps to establish domicile elsewhere before departing — simply leaving is not always enough. California does not recognize the FEIE, so CA-source income and income connected to California remains taxable.
• States with no income tax (Texas, Florida, Nevada, etc.) do not impose state income tax regardless of where you live, making them popular domicile choices for expats.
• Most other states stop taxing you once you establish domicile elsewhere, though the definition of when you become a nonresident varies.

Frequently Asked Questions